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Light at the end of the tunnel

Why struggling MTN is a 'buy'

Despite a slew of setbacks, MTN seems ripe for a comeback, with some market punters already in its corner

17 February 2017 - 07:10
Thabiso Mochiko

Picture: BLOOMBERG

MTN has suffered huge share price and earnings losses since October 2015, when it was hit with a multibillion-rand fine in Nigeria.

Despite this, Africa’s largest wireless carrier is set for a strong comeback, analysts say.

Last week, it warned that it will report a loss for the 2016 financial year largely as a result of the Nigerian fine, poor performance from SA and Nigeria, and currency fluctuations. However, some factors that have affected its 2016 financial performance were nonrecurring, meaning a much better performance could be expected in the 2017 financial year.

The Nigerian debacle has forced the company to overhaul its operations and its management. It went on a recruitment drive and has poached a number of bankers and telecoms executives.

Apart from poor performance from its two biggest operations and currency movements, the oil price also had an impact on MTN’s operations in Iran and Nigeria, both largely dependent on it.

Competition in many of its markets has also intensified. But some challenges are self-imposed, says Delphine Govender, chief investment officer and co-founder at Perpetua Investment Managers.

MTN appears to have underinvested in its network in Nigeria over the past four years — spending significantly less than its competitors were spending and what was being spent in SA.

It has invested in a slew of digital-based businesses, which have the potential of showing substantial growth

And MTN is less affected by the rapid shift to data away from voice, relative to other mobile telecoms. This is because MTN’s exposure to emerging markets with low levels of smartphone penetration and young populations bodes well for network traffic growth, says Govender.

The key value driver over the medium term will be improving operating efficiencies in the core mobile operations, while also investing in long-term adjacent opportunities such as mobile-based financial services and e-commerce, says Mergence Investment Managers portfolio manager Peter Takaendesa.

The new executives bring a great wealth of experience in the telecommunications, financial services and technology industries. This, added to current skills in the group, positions MTN well for fast-tracking its e-commerce, fintech and digital growth strategies.

Under previous leadership, the group had been more focused on mergers and acquisitions and heavy investments across Africa and the Middle East in other mobile network operators and in recent years in digital services.

“There is a sense that there was a lesser effort on aggressively executing operational efficiencies, as the focus at the time was largely on building and expanding,” says Govender.

“We see an opportunity for the new team to drive these even more, while pursuing accretive, opportunistic deals when it makes sense to do so.”

Despite the recent turmoil, MTN is still an attractive investment. It has the advantage of being in 22 countries, many of which still have low cellphone market penetration compared to its SA rival Vodacom, which is present in only five countries including SA.

Govender says Vodacom is currently trading on a high historic absolute and relative valuation and is priced for a continued positive outcome, while MTN’s current p:e ratio is distorted due to a depressed level of earnings (many one-off amounts) and is therefore considerably more attractively priced.

Takaendesa says it is time to consider adding more MTN shares into portfolios or holding on to shares if one is already a holder — especially given an attractive dividend yield, depressed earnings and an attractive rating for an investment horizon of between two and three years.

“At this stage I would tilt my positioning more to MTN (compared to Vodacom) as it is likely to benefit more from a recovery in African economies and MTN’s normalised valuation is more attractive than Vodacom’s,” he says.

The market capitalisations of Vodacom and MTN are now equal at around R220bn but MTN’s normalised earnings are much higher than those of Vodacom.

Since the beginning of the year MTN’s share price has lost about 8% but many analysts see a recovery coming from this group. The share price is coming off a low base, set in 2016.

With new management in place, it should start to deliver better performance as well as rebuild market confidence in the second half of this year. The recovering crude oil price should also improve economies in some of its key countries and the stock is on a good normalised dividend yield.

New CEO Rob Shuter arrives at MTN in March. He will be the fourth CEO in 24 years.